Journal article
Optimal internal control regulation: Standards, penalties, and leniency in enforcement
Stefan Schantl, Alfred Wagenhoferb
Journal of Accounting and Public Policy | Elsevier | Published : 2021
Abstract
To protect investors, regulators increasingly rely on regulating firms’ internal controls over financial reporting, but they punish noncompliance only if an internal control weakness enabled accounting manipulation. In other words, enforcement is manipulation-contingent. We develop an economic model with a manager who sequentially chooses internal control quality and manipulative effort, and a welfare-maximizing regulator who determines an internal control standard, the penalty size for internal control weaknesses, and when to invoke such a penalty. Internal control regulation under manipulation-contingent enforcement not only provides incentives to invest in internal controls, but also impr..
View full abstract